When selecting an insurer, one of the most important things to look at is an insurer’s financial ratings. Financial ratings are independent reviews of the company’s finances, based upon several different factors that often vary from one review organization to another.
There are four main companies that rate insurance companies in the United States. A.M. Best does nothing but evaluate insurance companies. Standard & Poor’s, Fitch Ratings, Weiss Ratings and Moody’s evaluate financial status on both insurers and other types of companies.
The Rating System
The rating system varies with each of those five companies. Each of them has their own rating system that determines the financial health of the company that they are reviewing. The “letter grades” that they use are somewhat similar, but they are different enough that the layperson would be confused if they were trying to determine how financially secure an insurer was from the latter grade alone. The rating that these grades represent ranges from “excellent” to “poor.” There is also a great deal of variance between companies in the way that they evaluate a financial situation. That means that ratings from two companies can be markedly different while using the same basic data.
These rating organizations use two different factors when evaluating a financial position: qualitative and quantitative. Quantitative factors include things like the income statement put out by the insurer, their balance sheet and ratios of losses to expenses. Qualitative factors, on the other hand, evaluate less tangible information such as the philosophy or perceived integrity of a company, the (somewhat arbitrary) evaluation of the quality of the management personnel and how likely they are to take risks.
What makes things even more confusing for consumers is that these evaluation companies provide multiple rating letter grades for each insurer. For example, one letter grade might represent a company’s financial strength while they are assigned a completely different letter grade that represents their ability to repay a large amount of debt.
To further mystify consumers, ratings where the letter grades are the same or where they represent the same value like “excellent” or “poor” mean different things to different evaluation agencies. For example, S&P will assign an AA rating to a company with an “excellent” financial position. Moody’s uses the same basic letter grade “Aa”; and the same basic evaluation; “excellent”; but these ratings could be markedly different. That’s why you don’t want to rely on a single company’s evaluation when choosing an insurer. A much better way to do it is to look at all of the ratings together.
The Limitations of These Ratings
Of course, these ratings are no real guarantee of the insurer’s ability to serve their customers. These ratings are not a perfect representation of whether or not an insurer can make their claim payments. The primary obligation of an insurer is to make their claim payments. A credit rating does not reflect this perfectly, nor is it a guarantee of the strength of an insurer’s financial position in the future.
Insurance Rating Companies
- A.M. Best Co. – ambest.com – 908-439-2200
- Fitch Ratings – fitchratings.com – 800-893-4824
- Moody’s Investor Service, Inc. – moodys.com
- Standard & Poors – standardandpoors.com – 800-523-4534
- Weiss Ratings – weissratings.com – 877-934-7778
Ethan’s Last Word
Make sure you understand the rating system of the rating company when you are evaluating insurers!